More than One Way to Skin a Cat
By Lou Gimbutis
One of the very first Real Estate Deals I ever completed with my mentor netted us just under $40K, and came from a lead that most “Investors” would have tossed into the trash can.
The Seller contacted us with a house worth approximately $100K, with 3 mortgages on it, all in default: the 1st for around $35K, the 2nd around $30K, the 3rd also around $30k. Doesn’t smell like a deal so far, does it?
We didn’t bother attempting to discount the first, as well-entrenched as they were with a 35% loan to value. We did get the 2nd to agree to accept around $3K as payment in full (lenders will do this with a loan in default to avoid getting wiped out at a foreclosure sale), but with the common stipulation that any junior lienholder (ie: the 3rd mortgage) receive no more than $500 (also quite common). This is normally a good thing, because the 2nd has in effect done our negotiating with the 3rd for us: “We’d love to give you more, but the 2nd won’t let us, so just take the $500 and let’s get this off your books.”
However, we were not counting on the sheer tom-foolery of Ocwen Federal: they refused to discount one nickel! Which, of course; negated our discount with the 2nd, so we’re back to a $95K payoff on a $100K house. The cat is starting to look dead, or mortally ill at best.
Time for a healthy dose of creativity! We asked the second if, rather than satisfying their loan for $3K, they would sell it to us intact for the same amount. They had no clue what we were talking about, so we had our attorney send them an “Assignment of Note & Mortgage,” along with a check for $3K. Upon receipt of the executed agreement, we now became the 2nd mortgage. From there, our attorney simply initiated foreclosure on behalf of the 2nd.
Now, the ball was in Ocwen’s court, and they had 2 choices: pay us off at face value for our 2nd we had paid $3K for ($30K plus interest plus attorney fees), or bid at the sale and still pay us off in full. They chose to do neither, so their lien “turned into a pumpkin” (detached from the house) at the sale. We ended up with a $100K property with about $42K in it all told, which we sold in the low 80s.
In Real Estate Investing, as in many other creative or complex pursuits, education is everything. The vast majority of my competitors would have gotten off the phone with this Seller as soon as possible, and never given it a second thought. As my Mentor used to say, “If you think Education is expensive, try Ignorance!”.
Lou Gimbutis, owner of Property Solutions, LLC, www.SellQuickNC.com and www.SellMobileHomeNow.com, has been buying and selling houses full-time since 2004, first in Michigan, then after moving to NC in 2007.